New Employment Act - what did we get?

24.08.2009

The new Employment Contracts Act was passed on 17 December 2008 by the Parliament and took effect on 1 July 2009.

First adopted in 1992, one of the oldest laws of the Republic of Estonia has thus acquired new content and form, Karin Madisson, Partner of Sorainen writes.

Employers may want to review their current employment relationships and harmonize corporate documentation with the new Act. Employees, on their part, need to read the new Act very carefully – they have a short time to get used to the new situation where the employee is no longer considered as the weaker party of an employment relationship. Employees must start standing for themselves.

As a lawyer, I am happy to note that finally an employment relationship under Estonian law also involves obligations and liability on the employee's part. The previous act mainly set forth the employer’s obligations. Undoubtedly, a positive feature of the new Act is that it joins various legal provisions regulating the employment relationship, previously dispersed between several acts (the Wages Act, Holidays Act, Working and Rest Time Act, and the Estonian SSR Labour Code). This helps overcoming terminology and content-related contradictions between various acts, ensuring increased legal certainty to employees and employers alike.

1.1. Employees’ obligations

Whereas under the current act and court practice employees basically had the obligation to be polite to employers and colleagues and to perform their job duties arising directly from the employment agreement, the new Act establishes several other general employee obligations. For example, employees must be loyal to the employer and avoid conflicts of interest. Among other things, this provision helps to end the current widespread practice where construction materials salesmen lead their employer’s customers to a company connected with them where they sell the employer’s products at a discount.  

Additionally, the new Act obliges employees to exercise the required duty of care considering the nature of the work, perform the job duties to the best of their knowledge and abilities keeping the employer’s best interests in mind, and prevent damage to the employer’s property. Employees must refrain from actions that might impair the employer’s reputation or make the employer unreliable in the eyes of clients or partners. Breach of these obligations may result in termination of the employment contract.

These provisions expand the opportunities to implement measures to prevent or reduce losses caused by dishonest employees. While we may be used to not having such provisions present in an employment contract, foreign investors find it rather extraordinary.

1.2. Material liability

I am glad to observe that a new coat has been tailored for regulating employees’ material liability. The old coat was incredibly old and shabby indeed and the regulation truly needed a makeover. The previous one was based on the Estonian SSR Labour Code with its roots dating back to 1972.

Most employers have had to deal with damage (such as theft, destruction of property or exploitation of employer’s information) inflicted by employees. Employees tend to be less careful with the employer’s property than with their own and the absence of related liability has contribute in building a feeling of impunity. Employees must begin to realise that reductions in the value of assets and interruptions or stoppages of work processes almost always mean material loss and it is reasonable to hold employees liable for such loss to ensure they use the employer’s property as prudently as their own. Previously it was of no use for the employer to claim damages from an employee even when the cause of the damage was obvious because damage collection was impossible (e.g. in absence of a separate agreement). This, in turn, resulted in employers dealing with the situation in various manners, from withholding damages from employees’ salaries without legal authorization, to waiving the claim due to the difficulty of recovery.

Under the new Act, the employee is responsible for losses resulting from wrongful breach of obligations arising from the employment contract (negligence, gross negligence or wilful misconduct). Entry into a separate agreement is no longer necessary.  However, a separate agreement may be concluded to establish an employee’s strict liability for damages to property entrusted to him or her for performing work duties, irrespective of fault. In determining the amount of loss, it must be considered whether the damage was caused intentionally or out of negligence and the circumstances surrounding the damage causation. Differently from the current regulation, the new Act allows claiming compensation for loss of profit in addition to direct damages. Furthermore, the new Act does not set a cap for the amount of damage (in absence of a respective separate agreement, the amount of damage is limited to the employee's one month salary).

Withholdings from salary cannot be made without the employee’s consent or a bailiff’s order – this provision has remained in place.

Employees need not be worried because liability may arise only from wrongful conduct and, if the amount of damage is disputable, the employer may not unilaterally set off the amount against salary.

Further, the new Act entitles the employer’s creditors to demand that employees compensate the damage inflicted on the employer by breach unless the creditor's claims are satisfied from the employer’s property. If the employer is declared bankrupt, a claim may be filed in the name of the employer only by the trustee in bankruptcy. In essence, the regulation is the same as with management board members. Employees’ liability to creditors is rather unique. Although the probability that creditors use the right to claim against employees is close to zero (as damages are claimed for the benefit of the employer and not of the creditor), I still consider that involving so many persons is unreasonable. Creditors can protect their interests by filing a bankruptcy petition, as the trustee in bankruptcy can easily establish whether an employee is at fault or not and if that is the case, file a claim against the employee. This prevents filing unreasonable claims and “scaring” the employees. The current experience shows that creditors’ claims against management board members tend to serve the purpose of making board members feel uncomfortable, pushing them to settle and pay damages even if it is not clear whether their actions were illegal or not. In my opinion, putting employees in the same position is not justified because they are even less able to stand for themselves and may therefore fall victim of this “blackmail” of sorts.

1.3. Employment relationship commencement

Unfortunately, the new Act provides insufficient regulation on the employment relationship commencement: the law protects employees unreasonably poorly in this area. An employment contract needs to be concluded in writing. However, the Act states that an employment contract is also deemed entered into if an employee agrees to do work which, according to the circumstances, can be expected to be done only for remuneration. This means that an employment relationship may be based on a verbal agreement.

For entering into an employment contract it is sufficient that the employer unilaterally presents to the employee a document setting out the material terms and conditions of employment. It is reasonable to assume that such a document is presented before the employee starts working. However, there is no such direct requirement in the Act. The employee may demand presentation of written terms and conditions at any time and the employer must present them within two weeks from receiving the request. If the employer fails to do so, the Labour Inspectorate may impose a fine of up to 20,000 kroons on the employer.

Let us imagine a situation where an employee starts working under conditions agreed orally and the employer does not puts the terms in writing. In a while, wanting to make sure if the employer has understood the conditions in a similar way, the employee demands submission of the employment terms in writing. The employer has two weeks to respond. What happens if the written conditions finally submitted do not correspond to the verbal agreement or the employer does not present the written conditions at all? The employee has already worked for at least over two weeks and now finds herself in a complicated situation, where she needs to dispute the terms and prove that actually they had agreed on different conditions – a task probably impossible to achieve. The options for the employee are to terminate the agreement and claim remuneration for work already performed. However, like other material employment conditions, the remuneration has not been established in writing either. This may force the employee to accept the employer’s new unilaterally amended terms that have been amended unilaterally to receive the earned remuneration and keep the job.

Further, if the employer has acted in bad faith, it is difficult for the employee to prove what were the conditions presented to her upon starting to work because the conditions need not be submitted against signature; these may be sent by email, for example. The Act entitles the employer to demand that the employee confirms receiving the information, but the employer itself is not required to confirm by signature the employment conditions submitted to the employee. Amending terms is just as easy – by employer notice. If the employee disagrees with the amended conditions he must challenge them immediately and the contract will remain valid in the current wording. Thus, if the employee is not aware of her right to challenge in due time or she has difficulty presenting evidence, she will find little protection from the law upon entry into and amendment of an employment contract.

I believe that employees are not ready yet to protect their rights in this way and the new regulation will give rise to too many disputes. Eliminating the strict requirement that employment contracts are in writing is questionable in practice. Actually, the requirement has not caused many problems; rather, it has helped preventing disputes and tax evasion.

In fact, it is in the interests of the employer to enter into a written employment contract if the employer wishes to establish a probation period, impose non-competition and confidentiality obligations, and so on. The validity of these undertakings depends on whether the agreement was made in writing or not. Consequently, it is advisable to enter into written employment contracts as before.

Employers often want to hire temporary staff when the volume of work is difficult to predict, in case of seasonal work, etc. Previously, entering into fixed-term employment contracts was restricted and employment relations with certain recurring elements were considered as entered into for an indefinite term. This made hiring temporary staff complicated despite the need for such staff. Employers had to avoid employing the same people many times, which was unreasonable both for employers and employees. Unfortunately, the regulation is almost the same in the new Act; employing temporary staff has not become much easier even though it is much needed in the current economic situation.

1.4.            Termination of employment

The new Act provides ampler opportunities for terminating an employment contract. The current legislation provides employers with a specific and strict list of termination grounds. This often resulted in the employer having to “look for” a reason to dismiss an unsuitable employee, whereas the unsuitability was very difficult to prove to an outsider (incl. the court). Often employers had to pay unreasonably big compensations to employees to avoid disputes and terminate employment contracts “by agreement”. As an employer has rightly noted, to part with an unsuitable employee an employer must pay special attention to the employee during a long period of time to be able to prove the employee's unsuitability while neglecting the other, good employees, which is absurd.

The new Act is much more liberal with respect to termination of employment contract, allowing termination where a good reason exists. If the employer initiates termination, the good reason must relate to the employee’s person, his behaviour, or the employer’s economic reasons. In most cases the employer must offer the employee another job or retraining, and give a warning before terminating the employment contract. Thus, the new Act gives employers a freer hand in dismissing unsuitable employees.

            Presumably, the ground that will give rise to most disputes is the employer’s right to terminate contract with an employee who has failed to duly perform her job duties for a long time due to insufficient work skills, job unsuitability or inadaptability that do not allow the employment relationship to continue (decrease in working capacity). In such case the employer must offer the employee another job or organize retraining. The court decides the criteria for applying this provision.

For the employee, probably the biggest change compared to the previous legislation is the shortening of the very long notice terms and the reduction of severance payments. In case of lay-off, notice terms are still connected with the length of employment but are reduced by more than a half. Compensation must be paid in case of lay-off only in the amount of one month’s salary and the amount is not connected with the length of employment.

The reduction of redundancy payments enables employers to invest more in business development and retraining instead of paying to employees who are leaving the company and will no longer contribute to the growth of the business. It is the state’s responsibility to provide social assistance. It is unreasonable to burden employers with huge termination compensation costs when their financial situation is already difficult and uncertain. The faster the company can restore its health, the greater the probability that we will have more jobs in the future. It is unreasonable to keep on payroll employees whose motivation is low and to whom the employer has no work to give. In Estonia a leaving employee receives redundancy payment and, upon registration as unemployed, also unemployment benefit, which is quite unusual. The amounts constitute a significant income and many laid off employees do not want to return to work, or at least not officially, with the state consequently paying them benefits without basis and losing tax revenue.

A positive aspect of the new Act is that it abolishes the right of employees to demand reinstatement if one of the parties objects to it. Thus, if an employee requests reinstatement but the employer disagrees, the employer is no longer required to restore the employee to their former job. Instead, the employee is entitled to compensation if the termination was illegal.

Another welcome amendment is the reduction in the role of the labour inspector. Approval is no longer required for terminating employment contracts, establishing part-time working time or internal work procedure rules, and so on. The approval requirement was unreasonably bureaucratic, as the labour inspector did not have any actual control or possibility to assess the circumstances if the documents were formalised correctly. Thus, the obligation was unreasonably burdensome for employers.

The only option the current legislation had for a distressed employer was to lay off employees, reduce the working time and salary or send employees on holiday with partial pay. The new Act adds a new extraordinary measure – to reduce the salary to the minimum wage. Such reduction can last for up to 3 months. The employee has the right to demand reduction of work load proportionally to the reduction in salary or, alternatively, terminate the agreement and receive compensation in the amount of one month’s salary.

1.5. Non-competition and non-disclosure

One of the biggest advantages of the new Act is an improved regulation on non-competition and non-disclosure. In this area, the current employment law basically relied on a few provisions in the law and several Supreme Court decisions. The principle is that the employee must understand the limits in time, space and object of these undertakings. This means that the employer must be especially careful in establishing these obligations and that a written agreement is required for the obligations to be valid.  

The biggest difference with the current legislation is that if a non-disclosure obligation remains in effect after the employment termination, the employer is no longer obligated to pay special remuneration. However, the same does not apply to non-competition obligations – the employer must pay a special monthly fee to the employee for complying with such undertaking after the termination of the employment contract. Non-competition obligations cannot be established for a period longer than a year after the end of the employment. Breach of these obligations constitutes sufficient grounds for termination of employment.

The above is by no means all that could be said on the new Act. The new Act was drafted on the basis of several compromises and the legislator has been too strict in some areas and too soft in others, often without a clear rationale. The Act has been and will be criticized and there is certainly room for future improvement. 

Source: www.bbn.ee

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